Goldman Sachs kept a downbeat view on prospects for agricultural
commodity prices even as it raised expectations for raw material values as a
whole, but acknowledged that it may prove too gloomy on softs and livestock.

The investment bank raised to "neutral" from "underweight"
its rating on commodities, saying that prospects for further price falls had
been diminished by a recent erosion in values and the prospect of strong
economic growth in countries such as the US.

"With commodities down 1% in the past month, and given our
economists' forecast for sequential acceleration in growth, we are raising our
12-month allocation for commodities," Goldman said, forecasting a neutral
performance over the next three months.

Over the next year, prices, as measured by the S&P GSCI
Enhanced Commodity Index will fall by 2.2%, less than the 4.0% drop forecast a
month ago.

'Stocks remain
elevated'

However, while lifting expectations for prices of industrial
metals - which it sees rising 0.5% over the next year compared with a previous
forecast of a 4.0% drop –Goldman stuck with forecasts for 10.0% drop in crop
prices.

Livestock futures were forecast dropping 3.0% over the next
year, up from a previous forecast of a 2.0% drop, although this reflects their strength
over the past month, with the bank leaving its target prices unchanged.

The USDA forecast records ahead for the likes of world corn
production and global soybean inventories, if forecasting some decline in wheat
inventories thanks to a drought-hit domestic winter wheat crop.

'Lower prices'

Still, Goldman said that for wheat, while "while there are
downside risks to North America and Australia production" from the potential El
Nino weather pattern, "European Union and Black Sea production estimates are in
turn skewed to the upside.

"This outlook points to lower wheat prices in coming months,
although US wheat prices will need to remain expensive relative to other
origins to limit exports."

In fact, the USDA forecast the EU overtaking the US on wheat
exports in 2014-15 for the first time on record to become the top exporter.

In corn, the bank, restating a forecast of a drop in futures
to $4.00 a bushel on a six-month horizon, said that "assuming normal weather
conditions this summer, we expect further increases in US and global corn
inventories and hence lower prices".

And in soybeans, Goldman, seeing prices down to $10.50 a
bushel in six months' time, said that the "slowdown in Chinese imports on high domestic
stocks and the expected record-large US soybean acreage this summer, point to a
sharp recovery in US soybean inventories in 2014-15… and lower soybean prices".

'Upside risk'

The bank also restated forecast for soft commodity prices
lower than investors are pricing in, seeing a retreat in cocoa to $2,700 a
tonne in as soon as three months, while forecasting sugar prices at around 17.5
cents a pound in a year's time, compared with the 19.25 cents a pound that May
2015 futures are trading at.

However, it acknowledged "upside risk" to its cocoa price forecasts
from wet weather which has curtailed hopes for Indonesian production, while
highlighting that an onset of the El Nino weather pattern "could exacerbate the
magnitude of the expected [world production] deficit".

El Ninos are linked to dry weather in West Africa, the top
cocoa producing region, while bringing heavy rains to some South American
growing areas, notably in Ecuador.

In sugar, the El Nino, which often brings too much rain to central
Brazil and too little to India, means that "the risks to our medium-term
forecasts are skewed to the upside".

And in arabica coffee, Goldman said that the uncertainty
over Brazil's output, thanks to a drought unprecedented for its time during the
growing cycle, means that values may exceed its forecast of 175 cents a pound
on three-, six- and 12-month horizons.

'Hog uncertainty'

In lean hogs too, for which the bank foresees Chicago prices
tumbling to 85 cents a pound in a year's time, below the futures curve, the level
of unknowns surrounding the US outbreak of porcine epidemic diahorrea virus
(PEDv) also creates scope for higher values.

"Given the degree of uncertainty we see potential for high
price volatility and renewed highs over the coming months," the bank said.

Lean hog futures have already fallen from historic highs,
especially on a front-month basis, with Chicago's May contract standing at
112.65 cents a pound on Wednesday, down 9.2% so far this month.

Although the PEDv outbreak has sapped hog numbers, higher
slaughter weights have kept pork supplies stronger than investors had expected.